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Ouch! When you don’t file and don’t pay your income taxes on time, you’re going to pay a price in penalties and interest that will apply to the taxes you owe and the time it takes you to file your return. These penalties and interest charges begin the day after you miss the deadline…AND like the Energizer Bunny, they keep adding and adding and adding to the amount you owe until the taxes owed are paid in full and the required tax returns are filed.
Interest – If you don’t pay your taxes by the deadline, interest begins right away on the amount of tax you owe. It adds up until the day you pay the tax owed. Even if you had what the IRS would determine as a “good reason” for not paying on time, you will still owe the interest on any outstanding amount. Interest is charged in addition to penalties assessed.
Late Payment Penalty – Even if you make a partial payment of the taxes you owe by the tax deadline date, you will still be assessed a penalty for paying any remaining balance late. The late payment penalty is usually ½ of 1% of any tax that is owed. The penalty is charged for each month or part of a month the tax remains unpaid. The maximum penalty charged is 25% of what is owed.
The late payment penalty will not be charged if you can prove to the IRS that you have a reasonable cause for not paying on time. A reasonable cause must be documented and could include things such as serious illness or incapacitation, a natural disaster or fire, the inability to obtain records, and the unavoidable absence or death of a member of the taxpayer’s family that causes a delay in completing a tax return. However, the lack of funds to pay taxes cannot be used as an excuse to file late or fail to file a return.
Late Filing Penalty – A late filing penalty is charged even when you request an extension. The penalty is usually 5% of the amount due for each month or part of a month your return is late. This penalty is assessed on top of the late payment penalty and in addition to interest charged on outstanding taxes. The maximum penalty for filing late is 25%. If your return is more than 60 days late, the minimum penalty is $135 or the balance of the tax due on your return, whichever is smaller. Again, you may avoid this penalty if you have a reasonable cause.
Now, let’s also consider the penalties and interest owed on any late state and local tax filings or taxes owed. Sometimes taxpayers forget that tax deadlines also apply to state and local tax filings. States, counties and municipalities have different ways of assessing and collecting taxes and also enforce penalties for failure to file, failure to file on time and failure to pay taxes. All of this can add up very quickly.
Another issue taxpayers sometimes miss is that all the different penalties and interest charges are independent of each other and may be added one on top of the other to the original tax obligation. They also don’t go away. New tallies on remaining balances continue to calculate until all obligations are met. This is how the interest and penalties can add up making paying on time and in full as well as filing on time a much better choice.
The longer you wait to settle current or past tax issues with late filings and payments, the more it will cost you in money and anxiety. There are ways to ease the burden. If you need more information on how much you may owe for not filing or not paying your taxes on time, please contact us at McRuer CPAs. We’ll help you figure the cost as well as your options to pay any penalties and interest you may owe.
